Seeking Alpha
Long only, research analyst, portfolio strategy, media
Profile| Send Message|
( followers)

A few readers have asked me to update on how my weekly covered call strategy has fared with my position in Intel (NASDAQ:INTC) since writing about the strategy here nearly 2 months ago.

To bring new readers up to speed, what I proposed within the article was that I would write weekly covered calls on my Intel position, which I held long through the year anyways as a more conservative dividend-yielding portion of my holdings. In writing these calls on a weekly basis, I could return around one half of a percent or more per week, allow myself to receive the benefits of the dividend, and also gain from gradual appreciation in the underlying stock.

Covered calls are explained here:

A covered call is a financial market transaction in which the seller of call options owns the corresponding amount of the underlying instrument, such as shares of a stock or other securities. If a trader buys the underlying instrument at the same time the trader sells the call, the strategy is often called a "buy-write" strategy. In equilibrium, the strategy has the same payoffs as writing a put option.

Writing (aka selling) a call generates income in the form of the premium paid by the option buyer. And if the stock price remains stable or increases, then the writer will be able to keep this income as a profit, even though the profit may have been higher if no call were written. The risk of stock ownership is not eliminated. If the stock price declines, then the net position will likely lose money.

The long position in the underlying instrument is said to provide the "cover" as the shares can be delivered to the buyer of the call if the buyer decides to exercise.

The strategy was illustrated as follows, based upon the share price of Intel at the time:

To begin, I will take $26,700 and purchase 1000 shares of Intel at $26.70 each. Immediately I will write call options against my 1000 shares, or 10 $27 call options, one step out of the money for proceeds of $16 per contract, or $160. After fees, this is a net gain of $142.50, or 0.534%. (Your fees may vary depending on broker and trading frequency.) Keep in mind these are weekly contracts, and a half percent does not sound like much, but when factored into 52 weeks per year, the yield becomes significant. This number is your minimum.

Depending on how the share price moves within the week, you will find yourself with one of two possible scenarios.

  1. Intel appreciates beyond $27 per share, and your shares are called away.

  2. Intel stagnates or depreciates, and does not go over $27 per share, and your shares remain with you.

Each case has a minimum and maximum reward. We are not particularly concerned with the underlying stock price in terms of loss/gain, as we would have held our shares long anyway.

As stated this is a great strategy to employ against any number of stocks you are bullish on, with a large market cap plus a dividend, and that are generally low in volatility such as Intel, Microsoft (NASDAQ:MSFT) or Altria (NYSE:MO).

As you can see from the chart below, writing $1 out of the money call options on a weekly basis for Intel has never resulted in the shares being called away with the exception of early May. Each and every option has expired out of the money and allowed me to keep all proceeds from the sale, and on the single instance where the option expired in the money I purchased the option back to cover. While the income is marginal, one half percent over the course of 8 weeks is a 4% gain, but to date my gain has been just short of 5% over these 8 weeks.

Click to enlarge.

Consider my sale on Friday at 15 and 16 cents per option for the weekly $28 strike price. Proceeds of $140 after fees yield slightly over 0.05% on my original cost basis of $26,700 on the underlying position. In roughly 16 weeks total, this allows for adding another 100 shares of Intel to the position, or 10%.

With Intel's guidance going forward into Q2 being regarded by the street as simply "OK," I would expect more sideways activity in the stock. I certainly do not expect volatility to push the stock into wild $1 or more swings in a short time frame, and thus this weekly covered call strategy should continue to offer impressive gains.

Disclosure: I am long INTC, MSFT, MO. I am short INTC $28 calls.

Source: Intel Covered Calls Working Extremely Well